FASB and IASB narrow lessee accounting model options

FASB and the International Accounting Standards Board (IASB) have
narrowed their focus in anticipation of a vote next month on a lessee
accounting model in their joint convergence project on leases.

During deliberation Thursday, the boards ceased consideration of two
of the four lessee accounting models that had been proposed.

FASB Chairman Leslie Seidman said that the vote in June should
consider the models known as “Approach A” and “Approach D,” with an
allowance for some combination of the two, depending on the
circumstances, also to be considered. IASB Chairman Hans Hoogervorst
said he also is open to some combination of those approaches.

A vote is expected during joint board meetings June 12–14.

Both approaches involve recognizing the lease liability on the
balance sheet, except for leases of less than 12 months.

In Approach A, the right-of-use (ROU) asset is accounted for as a
nonfinancial asset and measured at cost, less accumulated
amortization. The combination of the amortization charge on the ROU
asset and the interest expense on the lease liability results in a
total lease expense that would generally decrease over the term of the lease.

Approach D was developed by the FASB and IASB staffs following a
February meeting during which the boards requested that outreach to
stakeholders be performed on different expense patterns for lease
contracts. The staff presented Approach D to financial statement
users, lessees, lessors, and auditors from diverse geographic regions
during outreach in April and May.

In Approach D, the lessee would allocate the total lease payments
evenly over the lease term, resulting in straight-line total lease
expense. This would occur even if the pattern of lease payments is not
equal throughout the lease term. The lessee would present the total
payments as lease expense. In this approach, the ROU asset and the
lease liability are considered one unit of account when initially and
subsequently measuring those balances.

During Thursday’s board deliberations, Approach A was the most
popular, and board members seemed split on the importance of having
just one approach. They recognized the idea, advanced by users of
financial statements, that consistency is important. At the same time,
many of them said there is a great variety in leases that might make
uniform treatment undesirable.

IASB member Patricia McConnell said all leases have similar
characteristics and that preparers should be accounting for the
transaction accordingly. She favored Approach A.

“I don’t accept this notion that we should be trying to find a model
that reflects the underlying motivation of the lessee for entering
into the lease,” McConnell said. “I think we should be accounting for
the lease.”

Some others said certain leases are fundamentally different. FASB
member Russell Golden cited his participation in outreach with members
of the airline industry as an example.

He said the airline experts said airplane leases are best reported
on the balance sheet as described in Approach A, but the real estate
leases should be on the balance sheet under Approach D.

Seidman also said leases vary substantially.

“I have been convinced that just because you write ‘Lease’ at the
top of the paper does not mean that they all convey the same rights
and obligations,” she said.

The leases
project is an ongoing convergence project undertaken jointly by
FASB and the IASB that has been highly scrutinized because of its
scope, as a high percentage of companies are involved in leases of
some form or another.

The initial ED was published in August 2010, and the standard is
scheduled to be re-exposed in the second half of this year, according
to the current technical plan.